Its not the actual value of the houses that would scare me as an investor, it is how quickly they went up. When prices rise that fast, it really looks like a bubble.
You invest that same 500/month plus the 2-3000/year in expenses keeping the house maintained and rented, at a 10% return you'd have about a million dollars in 25 years. Granted the house would probably be worth at least that much anyway. Over the long term it likely makes a lot of sense.
It might be tough though for the short term on some families to keep your existing house as a rental property. A combination of modestly rising interest rates, softening of the rental market and a correction in the housing market could easily happen at the same time. All of a sudden that $500/month you thought you had to pay to keep your old house could turn into $1000. And if house price even receded a bit, you may not be able to get out of that house, because you ended up so heavily leveraged. By taking on 2 houses you allow yourself to double the return if things continued to go well, but you also open yourself up for double the risk. And it might be more of a risk than some people can afford to take.
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